GBP/EUR Exchange Rate to Remain Under Pressure into Early May's ECB Day

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The Euro is in demand and this will likely remain the case into the early May European Central Bank (ECB) interest rate hike.

The ECB is expected by markets to deliver either a 25 or 50 basis point interest rate hike on May 04 and signal further hikes can be expected.

This means the market expects more by way of hikes from the ECB than it does from both the Federal Reserve and Bank of England, an expectation that neatly encapsulates why the Eurozone's single currency has enjoyed a run of gains against the Dollar and Pound Sterling of late.

"The fact CHF and EUR lead the pack instead suggests that old-school central bank relative hawkishness concerns are the real drivers within the G10 space," says Shahab Jalinoos, head of FX research and strategy at Credit Suisse.

The Pound to Euro exchange rate has faded from highs at 1.1454 in early April to 1.1293 at the present time. The Euro to Dollar exchange rate has meanwhile just recorded a new 13-month high at 1.1095.

"It feels as if the euro is the market's preferred currency," says Antje Praefcke, FX Analyst at Commerzbank. "The ECB seems simply perceived as more restrictive at present thanks to the many comments from hawks on the board."

To be sure, GBP/EUR is not experiencing runaway declines, largely because the Bank of England is expected to raise interest rates on two more occasions in 2023.

No interest rate cuts are meanwhile expected from the Bank of England until 2024 is well underway. (The Fed is expected to start cutting in the second half of the year).

The key takeaway from an FX perspective is the ECB is the hawk in the flock and Euro exchange rates can continue to be supported as a result, potentially exposing GBP/EUR to remain below 1.13 over the coming days.

But looking further ahead, Praefcke says we should not forget that the eurozone's rate hiking cycle will at some point come to an end. "The doves amongst the board will eventually attract more attention again, once the data in the eurozone begins to deteriorate."

She says this all means that at some point the rate differential could develop to the disadvantage of the euro again.

It is at this point that the Pound, Dollar and other currencies with higher terminal central bank interest rates can potentially regain ground against the Euro.

"I do not want to ruin the atmosphere, but at some point, the good times are likely to be over for the euro. Even if it still takes a while until that happens, we should remember that and not be surprised when the time comes," says Praefcke.